The iPhone 5 Doesn’t Have NFC — So What?

With last Wednesday’s Apple iPhone 5 unveiling, and the recent Nokia Lumia launch, mobile is on top of the media agenda. But as the screen size and connector stories die down, the question of “when will my mobile phone become my wallet?” rises up once again. I’ve read at least a dozen stories about the NFC-less iPhone 5 in the past few days, and my question remains, who cares?

It baffles me why almost everyone uses the terms “mobile wallet” and “digital wallet” interchangeably, and why so many people further constrain the already-limited idea of a mobile wallet by equating it with Near Field Communication (NFC).

Let me be crystal clear on these two points:

Your mobile phone won’t be the one device that will forever banish your leather wallet to the back of a drawer. It will, however, be an important access point to your digital wallet — which will live in the cloud and follow you wherever you go.

NFC is a technology, not a strategy. It enables communication between two devices that are close to each other (hence the name). It is not the Holy Grail for mobile payments.

Why mobile wallets are not digital wallets
Simply put, the term “mobile wallet” refers to when the actual mobile phone, or other mobile device, becomes the wallet. All of your financial information, such as bank account and credit card numbers, are stored on the mobile device, and you need to have the device with you for the transaction to be possible.

Digital wallets exist in the cloud. They are not tethered to one specific device such as a mobile phone, but are accessible from a variety of devices (laptop, iPad, ultrabook, Xbox, etc.) and in a number of ways. Sensitive financial information is stored in the cloud, not on the actual device.

Already, at The Home Depot, you can pay without ever pulling anything out of your pocket at all. You can pay just using your phone number and PIN that directly connects to your digital wallet. But this is just the beginning of the revolution.

For example, let’s say you’re in your car and you want to drive through the local fast food joint. Instead of whipping out your wallet or looking for your phone, you “check in” to the fast food joint’s point-of-sale system (POS) using the digital wallet accessible from your car’s connected onboard computer. The restaurant immediately recognizes you from the image transmitted when you check in, and can look at what you’ve previously bought at that restaurant via your digital wallet. It’s able to not only ask if you want “the usual” but also to deliver special offers to thank you for your loyalty.

When you pull up and get your food, no money exchanges hands — you don’t even have to tap a device against a terminal. The meal is charged to your digital wallet. This is all technically possible today.

Why NFC does not equal mobile payments
Mobile payments break into two main camps — what we call “remote” and “proximity” payments. Remote payments happen when you don’t need to be in the same room as someone else to use your mobile phone to pay for something — buying an item on the eBay mobile app for example. This is huge today.

Proximity payments are when you need to be in the same room to make the payment. There are many technologies you could use to make a proximity payment. Bluetooth, RFID, even an audio signal could initiate a mobile payment from your phone — and yes, NFC could also do this. What most people don’t realize is that NFC is not a one-size-fits-all technology. It has different modes that do different things and have different levels of security. Let me tell you about two:

P2P mode NFC: this is the simplest mode available and just allows a fast connection to be made between two devices. However, it just identifies and connects the two devices — the transaction happens “in the cloud” behind a secure firewall because P2P mode while easy, is not secure.

Secure Element NFC: This is what most people equate with mobile payments. Secure element NFC puts a safety box in your phone, which stores all your financial information. One of the problems is that the safety box can be anywhere on the phone — the hardware, SIM card, you could in theory even pop it into the battery case. All the companies that touch the phone or the customer have potential access to the secure element but they all need to work together to make an NFC payment work. This is one of the many problems that is stifling fast adoption.

No retailer will have multiple NFC boxes to take payments from different networks, and the NFC terminals shipping today do little more than just transmit the card number and transaction size. They’re not equipped to automatically accept the complex coupons and offers that make the digital wallet so exciting. On the technology side, carriers are trying one solution, phone manufacturers another, and technology companies yet another. Meanwhile, the consumer is standing at the register thinking “really, how hard is it to pull out my credit card?”

Why would Apple want to step into that mess?

In spite of the technological advances that make digital payments possible, it will not be any one technology that wins the day for either the consumer or the retailer.

Sure, the technology needs to be great, and simple, and it should get out of the way of the user. The much more critical part of the equation will be what the digital wallet will offer beyond just another way to pay. It needs to remove complexity from your life, not add to it. Those digital wallets that are able to safely store your financial information — your credit cards, airline miles, balances, etc. — plus have the ability to receive relevant and real time coupons and offers that are tailored specifically to each user, will be the ones embraced by both consumers and the brands that want to reach them.

It’s inevitable that digital wallets will become an indispensable part of consumers’ everyday lives, and one that will save them time and money. The new iPhone 5 and its competitors will surely be one of the primary vehicles people will use to access their digital wallets while on the go, but when you ask the average person what is the underlying technology used to make that connection, the answer will be “who cares?”

Relevance to the consumer will be king, and the ability to act in a seamless and secure environment across any device or platform will be what matters most to that consumer. For this vision to be truly realized it will be digital wallets, not mobile wallets, that will rule the day.

Carey Kolaja is the head of product solutions for the Americas. In this regional role, she leads a team responsible for the creation of products and solutions that reflect the present and future needs of PayPal’s customers. Previously, Carey served as the chief of operations for global product, and prior to that, she held various roles at PayPal in product engineering, Information technology, and marketing.

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